Commercial Real Estate Developers in the 19th Century
Most New York schoolchildren learn that the island of Manhattan was bought by Peter Minuit of the Dutch West India Company from a tribe of Native Americans in 1626. He paid with beads and wampum whose equivalent value today was less than $30. To characterize the deal in later terms, it’s probably the first New World evidence that a sale of real estate takes place only when a buyer and seller disagree on the true value of the property being conveyed. Natives undervalued the island, viewing it as a forest from which most game had been hunted out and whose subsurface bedrock made it unsuitable for farming. The Dutch saw it as one of the greatest natural ports on the globe, a find base from which to conquer the New World… but made sure not to show their true evaluation of property value by using the classic tactic of refusing to overpay. One of the first real estate development transactions in American history was crude and unsophisticated – a far cry from the expertise, financial acumen, and vision developers and commercial contractors exhibit today.
The Origins of the Commercial Real Estate Developer – the 1800s
A typical American real estate developer in the 1800s would not have considered himself to be a developer or a commercial contractor, and many did not own “construction companies.” Real estate tycoons like John Jacob Astor III saw themselves as businessmen who used real estate to meet their investment and business goals: they bought land, constructed office buildings and hotels, and developed apartment buildings… all were means to an investment and a business end. In most cases their projects supported their core businesses; they weren’t intended to be stand-alone development projects. Today’s real estate developer, while more specialized than his counterpart in the 1800s, is a direct descendent of the early developers, commercial contractors, and construction companies who built, as an example, New York City.
Unlike in Europe, in the United States the processes of settling the countryside and founding cities often took place simultaneously. At other times towns and cities were founded in areas that were not settled at all, and settlement of the surrounding countryside followed. Some U.S. cities and towns were founded as a strategic act by government to open up or gain control of a particular region. Pittsburgh, at the confluence of the Allegheny and Susquehanna Rivers, is a prime example. In many cases the government worked hand in hand with businessmen and developers to create new cities, and as a result new economic opportunities for citizens in search of a new life.
Many more cities and commercial districts were founded as speculative ventures. Land was acquired, subdivided, and sold by speculators and real estate developers as a commercial undertaking. The growth of U.S. business and the massive population explosion created the need and the opportunity for real estate developers. Construction companies and commercial contractors also quickly moved to fill the tremendous demand created by the rapid growth of industrial cities.
The growth of U.S. business and massive population explosion created the need and the opportunity for real estate developers. By the end of the 1800s hundreds of thousands of immigrants poured into the country, many arriving in New York. The U.S. rate of natural population increase in the early nineteenth century was also one of the highest in history. The explosive population growth, along with the rapidly increasing economy, fueled the need for developers of factories, warehouses, and housing… and the construction companies to implement those projects.
In 1800 the U.S. population was overwhelmingly located east of the Alleghenies and, in New England, east of the Green Mountains. The nation’s few cities, which were really the size of small or medium-sized towns by modern standards, were trading and commercial centers located on the coast. They served to connect the outlying areas of the United States with the rest of the world. New York had been founded at the best natural harbor on the east coast. Boston was likewise founded at the best harbor in its region. Baltimore was founded where the Patapsco River empties into the Chesapeake Bay; Philadelphia was founded near the Schuylkill and Delaware rivers, which flow to the Atlantic.
In 1800 the population of the United States was about 5 million and the urbanized population – defined as people living in places with a population of 2,500 or more – was about 5 percent of the total population. New York City had a population of about 60,000 and Philadelphia was second with about 41,000. Baltimore and Boston, the third and fourth largest cities – had populations in the mid 20,000s. By 1900 the population of the nation had increased by a factor of 15 to about 75 million. Its urban population, however, had increased by a factor of 100 to about 30 million. New York City’s population had increased more than fifty times to 3.4 million. Philadelphia’s population had grown to about 1.3 million. Chicago, which literally did not exist as a settled place in 1800, had a population of about 1.7 million. Just like today, when real estate developers and major commercial contractors fill the demand for construction in rapidly-growing cities like Las Vegas and Phoenix, developers and construction companies rode the population booms throughout the nineteenth century.
The Nature of Commercial Real Estate Development in the 1800s
Over the century a variety of forces combined to increase the percentage of Americans who lived in cities, to cause many cities to grow at enormous rates, and to develop in a very compact and extraordinarily dense form. One force behind urban growth, beyond that of overall population growth, was the increasing efficiency of agriculture. At the beginning of the nineteenth century about 90 percent of the U.S. labor force worked in agriculture. The average farm family fed both itself and a small fraction of one non-farm family. By 1880 as many people were employed off the land as on the land. A large portion of the population was now available to lead an urban life. To the push provided by increasing efficiency in agriculture was added the pull of growing manufacturing and trade – and as a result the growth in real estate development and construction.
The growth of manufacturing provided masses of industrial employment in urban centers. Unlike today’s automated factories, the factory of the nineteenth century provided large amounts of employment in machine tending and materials handling that could be done by a relatively uneducated workforce.
Industrial employment tended to be concentrated in cities, often in their centers, largely because of the particular properties of nineteenth-century transportation. Overland transportation by horse and wagon was extremely expensive. A team of horses and a man could produce only a few ton/miles per day. The two low-cost modes of transportation at the beginning of the nineteenth century were the oceangoing vessel and the canal boat or riverboat. The first several decades of the century saw a spate of canal building in the United States, generally promoted by local business interests precisely because of the enormous transportation cost advantages that canals provided. (In fact, commercial contracting and construction as we know it today largely didn’t exist – most businesspersons served as their own “contractor” and hired labor to add to their warehouse and commercial holdings.)
The best known transportation project was the Erie Canal, completed in the 1820s. It was a private venture by a group of New York City businessmen and civic leaders designed to give the city a commercial reach into the Midwest by linking the Hudson River to Lake Erie. It was in its time an enormously successful project, and is one of the reasons New York City rapidly outgrew its two main commercial rivals, Boston and Philadelphia.
The coming of railroad technology in the 1830s provided another and superior low-cost mode of transportation, and the canal-building era came to a quick end. Being on a railroad line gave a city a great commercial advantage, and the canal-building business cycle was repeated, this time with rails. Many railroads were built with municipal bonds or with private bonds guaranteed by municipalities. In other cases, private industries financed railroad construction in order to service the transportation needs of their businesses. Acquiring land and rights-of-way for a railroad line required a great deal of negotiation and management skill on the part of the railroad developers, similar to the same skills and expertise needed by today’s real estate developers who assemble land for major construction projects like office buildings or industrial complexes.
The transportation technology of the nineteenth century gave a site that could be served by water and by rail an enormous cost advantage. That generally meant an urban site since that was where the docks and the rail terminals were. Industrial and commercial real estate development focused heavily on areas convenient to transportation centers in the same way that many factories and industries today locate their facilities near major interstate highways. The principles remain the same, although the modes of transportation continue to change.
The perfect industrial location for a firm in the 1800s involved in international trade was a place like lower Manhattan. By the mid nineteenth century, tracks running a few blocks east of the Hudson shoreline linked the area to the Midwest along roughly the same water level route through the Mohawk Valley as did the Erie Canal. Piers on the Hudson side of Manhattan and wrapping around the lower tip of Manhattan to the East River side of the island accommodated ships from all over the world. Goods could move between, say, London and Chicago and make all but a few hundred yards of the trip by low-cost mode. Today the tracks are gone, and the Manhattan waterfront now handles no freight. The most visible remains of this era are the still numerous manufacturing loft buildings in lower Manhattan – developers have re-purposed those buildings for use as residences, artists’ studios, and for a wide variety of commercial purposes.
In an age before the automobile and the truck, large amounts of commercial activity clustered around the waterfront. The pull of factory employment to the cities was abetted by some of the offshoots of manufacturing. For example, without the great output of factory production the department store could not exist. It was also a source of mass employment at a single point on the map. So too, was the corporate headquarters that came into being because of the existence of the large manufacturing firm. As manufacturing grew, the volume of goods to be transported grew and so, too, did goods handling employment like carting and long-shoring.
Developers were quick to construct supporting facilities for factories: office buildings, warehouses, and apartment buildings. An industrialist in the 1800s may have thought of himself a factory owner, but in fact he was the precursor of today’s diversified real estate developer: first he built a factory, then office buildings and warehouses to support that factory, and then housing for his workers. By extension a major industrialist of the 1800s became a real estate developer simply in order to maintain his business – specialization in real estate development didn’t become widespread until the late 1800s and early 1900s.
All these forces pulled large numbers of people into cities. The particular character of nineteenth-century transportation and manufacturing technology also produced great crowding. In Manhattan’s Lower East Side, population densities in a few wards (a political district for the election of council-men) reached as high as 500,000 people per square mile, a figure comparable to the present-day population of the entire city of Cleveland.
In the nineteenth century the preferred structure for a large manufacturing operation was a multi-story building. The reason was that power for machinery was generally provided by a steam engine and transmitted through the building by a system of shafts, pulleys, and leather belts. Thus power could not be transmitted very far. The structural shape that put the most amount of manufacturing floor space within a practical distance of the power source was the multistory building. Where waterpower ran machinery, the same situation prevailed – it made sense to mass the operation as close to the source of power as possible. Commercial contractors specialized in building multi-story manufacturing facilities, and many real estate developers quickly moved to build warehouse space adjacent to those factories.
Throughout most of the nineteenth century most employees traveled to work on foot. That meant that masses of housing needed to be built near to central employment sites. Beginning in the mid nineteenth century horse-drawn trolley systems were built in some cities, but they were not much faster than walking.
Two nineteenth-century architectural inventions spurred by the needs of developers for added convenience for their clients also contributed to very high employment densities. These were the invention of steel frame construction and the invention of the elevator. The steel frame made the skyscraper architecturally possible. The elevator made the skyscraper commercially feasible. As office employment grew, these two inventions made it possible to place huge numbers of jobs in a very small land area, conveniently located near factories, housing, and transportation centers. A key point of differentiation for construction companies was the ability to provide elevator services – elevators not only made it easy to move large numbers of people, but they also created a perception advantage for real estate developers who could offer elevator construction and installation as part of their normal suite of services.
New Cities Grow . . . But Commercial Real Estate Developers Remain Localized
Throughout the nineteenth century new towns and cities appeared in the United States with great frequency. Unlike the pattern of growth in Europe, the town was started first and the countryside around settled afterwards. Many towns started as speculative ventures. For example, in parts of the Midwest entrepreneurs obtained large blocks of land under the terms of the Northwest Ordinance of 1785, (often at less than $1 per acre), laid out towns, subdivided the land, and then sold building lots to private citizens and developers.
Shortly before the Civil War the federal government began to make grants of land to railroads. Ultimately, approximately 160 million acres, roughly one quarter of a million square miles of land, was given by the federal government either directly or through the states to railroad companies. That made the railroads landowners on a spectacular scale. From about 1860 on, railroads focused on land development by creating towns along the right of way of the railroad line. The building of the railroad boosted land values and the development of the town provided the railroad with a guaranteed supply of customers. Many railroads formed partnerships with real local real state developers and contractors to mutual advantage – very few developers from eastern cities attempted to operate in the Midwest, allowing small Midwestern developers and construction companies to grow rapidly and expand their own operations.
The new cities grew with unprecedented speed. The most extraordinary case is Chicago. The city grew slowly at first, reaching a population of less than 5,000 by 1840. But population jumped to about 109,000 by 1860, approximately half a million in 1880 and almost 1.7 million by 1900. The population explosion created tremendous demand for construction companies, commercial contractors, and real estate developers to meet the demands for office space, housing, and industrial buildings.
No city in human history had ever grown from nothing to a population of 1.7 million in 70 years. What made Chicago’s growth possible? The rapid population growth of the Mississippi Valley provided an agricultural basis to sustain the economy of the city. Chicago was the biggest link between the agriculture and natural resources of the Midwest and the manufacturing economy of Europe and the eastern United States. In time, the city also became a manufacturing power in its own right. Because the Mississippi Valley had not long been settled, other than by the Native American population, there was no well-developed network of smaller cities with which it had to compete. Steamboat and railroad technology gave the city a huge reach that it could not have gained with earlier transportation technologies. Finally, the expertise gained by Midwestern real estate developers and commercial contractors from developing smaller towns along the railroad lines gave them a basis of skill and background to apply to the construction and development of a major city.
Just like in Chicago, the old adage of “location, location, location” applied to the growth and development of most major American cities in the 1800s. Commercial traders established operations where transportation advantages existed. Commercial ventures created population growth as jobs were created, and real estate developers and commercial contractors moved quickly to fill the demand for warehouses, factories, and housing. In most new cities in the 1800s the second largest industry was construction companies – the growth of manufacturing and commerce provided the capital for developers and commercial contractors. While few real estate development “companies” existed in the 1800s, the nature of their business is similar to today: identify a need, partner with governmental and corporate entities, and develop an effective and efficient solution to a manufacturing, warehouse, office space, and even entertainment or recreation need. Today’s real estate developer and commercial contractor would feel at home in the 1800s construction environment. The landscape may be different, but the principles are the same: provide outstanding solutions for business and personal needs.